Seller Financing - Got one on the hook!

[Matt Hudson]

Last week I received a call from a mailer. The gentleman asked me abruptly, "How much will you buy my house for?!". Before I could reply he proceeded to berate me and call me a "f*#$%ing vulture". 

Fast forward to today I get a call from a nice lady who rents her a house in East Nashville. One of the hottest markets in Nashville and just down the street from my home. She owns it outright and is willing to talk about a purchase. I WANT THIS HOUSE!

She has had the same renter for 15 years and the renter takes great care of the house. I drove by the home and it look like an older woman that has really put her roots down. 

East Nashville, like many other urban neighborhoods, has seen major gentrification. Affordable housing is an issue and older renters and homeowners are getting displaced. The idea of contributing to this doesn't appeal to me. How do I structure this deal while keeping the tenant?

I'm not certain what the current tenant pays but I 100% guarantee it's not the $1500/mo rent the house could get. It's likely $750-800/mo.  

[Steve Frye]

@Matt Hudson congratulations on getting mailers to work for you.  Finding a deal in EN thats well taken care of is a unicorn you know.  Curious what system you used to drill down to potential clients and target your market?  

Also, let me know if you need any help in looking at rents for the area or potential value.  

[Matt Hudson]

Hey @Steve Frye! A unicorn is right!!! That's why I want to make this work for all 3 parties involved.

I own an advertising agency so I feel like I have the ability to write compelling copy. However, I'm by no means an expert at real estate skip tracing or direct mail! I'm an avid runner and have ran hundreds of miles around this neighborhood through the years. So, I subscribed to DealMachine.com and as I see properties that I feel like have potential I enter them into my database right on the spot. Takes literally 10 seconds and I'm on my way. It's less quantity and more quality. I haven't gotten a deal yet from the mailer but have only sent out about 400 total mailers in the last 2 months. I'll keep you posted as times goes along...

[Dan Beaulieu]

Hey @Matt Hudson! Congrats on the lead! Sounds like she is a perfect candidate for seller financing! It's important to uncover her motivations and see what is most important to her. Most often a tired landlord would LOVE to keep the passive income but not deal with the headaches. I always approach seller financing by explaining the tax advantages, and proposing monthly payment amounts close to the rent that she was getting if it was way under market instead of proposing a certain interest rate. Often times by doing this you could get the interest rate very low, if not 0. 

You can give the seller 2 options:

For an all cash sale: Pay Capital gains all at once and then take what is left over and invest it with higher risk or have it sitting in the bank losing money.

Seller Financing Option: Take the entire amount, only pay taxes on the installments, and earn interest on what would have been the government's money... 

Lay it out there like this and she is almost certain to go with this option (Especially in Tennessee with it's strong anti-government sentiment)

[Matt Hudson]

Hey @Dan Beaulieu! Good to talk to you again and I appreciate the insight! 

During our initial conversation I asked her why she was wanting to sell. Her response was that they are getting older and would like to have the money. He concern however was her long term tenant. She spoke in detail on how she was not wanted to leave her stranded. So I've been trying to structure offers that satisfy those concerns. Not so easy...

So I came up with 3 offers this morning. Being that they are in their early 60s I was trying to keep the terms at 10 years or less. I was also trying to incorporate concessions for the current tenant who is currently paying $725 where the average rent (for that same size home) is $1500+. So I unfortunately will not be able to keep her there.

Comps: Fully renovated ~$300k. Similar properties in a "As-is" ~$230k

Offer #1: ARV $290,700k ($255/sqft) x .70 = $203,490 – $53,490 (repairs) = $150k

• Seller: Pro – Get all cash up front. Con – Decreased purchased price and captain gains hit.
• Buyer: Pro – Decreased purchase price. Con – Large capital outlay in purchase and repair. Higher risk flip.
• Tenant: Pro – 30 Days to vacate and a $725 buyer credit. Con – Must leave in 30 days

Offer #2: Purchase at $200k – 20k down and $180k in 5 years

• Seller: Pro – Some cash up front. Con – No more cash until year 5
• Buyer: Pro – Less money upfront. Con – Capital outlay of repair to get higher price in rent
• Tenant: Pro – 60 Days to vacate. Con – No seller credit

Offer #3: $228k - $40,500 down = $187,500 then $1500/mo after 90 days for 125 months

• Seller: Pro – Good amount of cash up front. Premium Price. More than double rent monthly. Deferred taxes. Con – Payout is 125 months
• Buyer: Pro – Marginal amount upfront. Payment plan. Con – Not buying below market value.
• Tenant: Pro – 90 Days to vacate. Con – Still having to move

The seller and I spoke again last night. We are going to have lunch week after next in St. Augustine, FL. We just happen to be there at the same time. Wish me luck!!!

[Dan Beaulieu]

@Matt Hudson St Augustine is Awesome! So regarding Option 2... If your payments are 1500 a month and the rent is 1500 a month I'm not sure how that would benefit you at all? If the seller goes for the all cash option and you are able to buy it at such a discount and you are concerned about capital outlay, perhaps a 100% fix and flip loan is the way to go? 

[Blake Hulett]

Nice grab Matt! It is tough when you start applying emotion to investment decisions. The best way to make everybody happy in this situation is to try to get the seller on the same page of wanting to preserve the integrity of the neighborhood. Without the seller on board, it will be very tough to make this happen. 

[Matt Hudson]

@Dan Beaulieu

I see what you are saying. The thought is I don't think they will go for seller financing terms much over 10 years. Being she said they want money now and the are ~63 years old. The benefit is obviously not short term cash flow. If I could extend the terms to 15 years then I could cash flow ($1041.66 payment for 180 months - Rent $1500). Maybe there is a middle ground...12 years. However, I would be getting the property at 0% interest and paying it completely off in 10 years. 

If they go the all cash option then I will gladly fix and flip or BRRR depending on the extent of the rehab.

[Dennis M.]

Well what are the terms and the price she wants ??

[Matt Hudson]

@Dennis M. That is yet to be determined and will come out in conversation. Being that this will be my first seller financing deal I'm trying to get an idea of properly structure it to where all parties win. 

[Luke Saglimbeni]

@Matt Hudson. From a tax perspective, when doing seller financing or installment sales (irs term) you need to make sure the interest rate is above a certain threshold. Unstated interest occurs when not enough interest income is recognized. Thus, recharacterizing some of the principal payments as ordinary income, (taxed at rates usually higher than long term capital gains treatment)

https://www.irs.gov/taxtopics/tc705

Good luck

[Dennis M.]

That’s nice but Just make sure that you at least win !

do not pay more than the house is worth 

Do not agree to balloons 

Get the interest as low as possible not over 6-7% if they push see if you can get them to agree to a few more monthly payments instead ,sometimes folks don’t do the math 

Get your seller to hold the note as Long as possible and monthly payments low as possible 

pay no more than 10% down Preferably 5% 

Have the agreement structured in such a way that the buyer and seller  split the Closing fees and that you have the ability to buy the seller out anytime with no penalty 

Use a good RE lawyer to look the agreement over no kitchen table deals 

[Lucas Duce]

Hey Matt,

It seem's like the current tenant is a big concern of the seller.  I like how you incorporated the $725 buyer's credit in one of the offer, but maybe to make it more enticing to the seller, adding some more specificity to how the tenant will benefit would help you land a better deal.  Maybe specifics like "I'll pay for a moving company to box up all of the tenant's belongings and move it" since they're older and may not have family in town to help.  Who knows, maybe after the multiple years of a landlord/tenant relationship they became good friends and the benefits to the tenant may be more significant than a monetary incentive.  I'd try to work in a better pro for the tenant in each deal.  Good luck!

- Lucas Duce

[Meir Greenblatt]

@Matt Hudson

Don't assume they want all the money now or in 10 years, try explaining to them the difference of paying taxes on a big sum of money at once, and between paying taxes on small amounts of money each month.

They may live for 30 more years.

Also its better to leave for the kids a note that provides income each month, then to leave them a big sum of money.

(Please verify the info, this is just what I remember from all the podcasts)

[Jeff Filali]

@Matt Hudson On your offers, figure out your cash price, and use that to determine your seller finance offer. You're trying to solve objections before they exist. If your cash price would be $150K, MY 1st offer would be something like "what about 10% down in CASH, balance of $135K paid at $800 monthly and a 10 year balloon payoff for any balance still owed, and I'll be paying all the insurance, property taxes, repairs, etc so that YOU net the full $800 monthly". Then negotiate based on their response. You'll find most people who are reaching their retirement years would prefer seller financing because of the taxes and cashflow.   I've had several deals at ZERO interest by offering like this.

Also, Is the long-term tenant on a lease, or month-to-month? Many who have been there longer then 1 year are month-to-month unless the landlord is more experienced or uses PM and they require new lease at end of every lease term. If M-to-M, Do yourself a favor and in your offer/contract include clause along the lines of "PRIOR TO CLOSING existing tenant must either sign new lease with buyer at buyer's rental rate and terms, or the current owner is responsible for removing tenant prior to closing". I learned the hard way. Purchased a portfolio of properties and waited until closing to have my PM get updated leases signed. Come to find out one tenant was 90 days behind on paying (wasn't disclosed) and it took my PM about 45 days to get them out because of not knowing and trying to get a hold of them to get lease signed, so it was almost a month before we filed, then had to do repairs, and by the time all was said and it was rented to new tenant, lost 3 months of rent. Found out the seller filed on that tenant the day after we closed trying to get his money from them but never disclosed they were behind.

Good luck!!

[Dennis M.]

a quick tip

A good negotiator doesn’t say I’ll give you “10 grand down “ to the seller

Instead you form open questions and present them as to not add pressure or pin a number

“ what if I could give you your full price with 10,000$ down and the rest on monthly terms ?”